12. It has become a cliché to state that
recent years have seen a revolution in communications. Information
can be stored, replicated, communicated and shared in ways which
were unthinkable just a few decades ago. Commercial and social
transactions are more efficient, connected enterprises have a
global reach and machines can process and analyse information
on a superhuman scale. Almost any information can be represented
digitally. We live in an information world without frontiers,
in which anyone can publish, anyone can consume, anyone can copy,
and anyone can modify and reuse. The advent of broadband has played
a crucial role in this evolving landscape. Moreover, extrapolating
developments over the past 20 years, analysts foretell, for example,
a future where appliances in our homes and at work, like fridges
and desktops, are connected and enabled as interactive multimedia
devices, and far more beyond, bringing benefits to society. Such
an ever changing world would require enhanced broadband provision,
offering an explanation for, and a justification for supporting,
increasing consumer demand for faster broadband in telecoms networks
today. The continuous development of broadband infrastructure
and policy-making in this area therefore is of critical importance,
requiring strategic, long term planning and collective working
between governments, regulators and industry.

The UK's broadband performance

13. Like other technological advances, broadband
has inspired devoted evangelists and we received evidence from
a number of them. To their disappointment, when it comes to the
most highly quoted broadband league tables, the UK does noton
most indiceshave a place on the podium. Take average connection
speed; according to the most recent Akamai 'State of the Internet'
report, the UK ranks 16th in Europe and 25th globally.[3]
Some who contributed evidence to this inquiry have lamented that
the UK is therefore "achieving speeds more than three times
slower than South Korea."[4]
Moreover, in the UK, 14% are receiving speeds of less than 2 megabits
per second (Mbps),[5] regarded
by the Government as the minimum speed which allows you to use
the internet reasonably effectively. Such a situation has caused
much discussion of the dangers of the so-called 'digital divide',
the dislocation between increasingly active users of the internet
and users whose connections or whose skills do not allow them
to harness the potential of the internet.

14. It has, however, also been pointed out to
us on a number of occasions that the UK's performance in terms
of the internet economy can be seen as hugely encouraging, trail-blazing
even. Recent research by the Boston Consulting Group put the percentage
of the UK's GDP derived from the internet economy at double the
G20 average. The internet's contribution to UK GDP in 2010 was
more than that of construction and education, and online retail
is expected to account for up to 23% of total UK retail in 2016.
The report concludes that, "the UK has become a nation of
digital shopkeepers."[6]
Whilst there may seem to be a contradiction here between the UK's
moderate broadband connectivity and its economic performance,
it can be explained by the fact that much e-commerce activity
does not actually require superlative broadband speeds. The conclusion
to be drawn is that the UK has vast potential in this sphere.
If the UK can enhance its broadband provision, then further economic
benefits will follow; certainly the Government's strategy is based
on the belief that enhanced broadband provision will be a catalyst
for economic dynamism. Equally, it could be argued that the UK's
strong performance in the internet economy means that the UK has
more to lose if it falls behind.

15. There are six important indicators to bear
in mind when considering broadband performance, four of which
go beyond speed:

(c) Latency (how long it takes for a packet of
data to arrive at its destination);

(d) Jitter (also known as packet delay variation,
the variability of latency);

(e) Reliability of service and the length of
time required to resolve problems.

(f) Contention (the number of users sharing the
same link to the internet)

16. Speed alone is therefore not the only determiner
of broadband performance. Symmetry, latency, jitter, reliability
and contention are also critical; what use for instance is a fast
connection if it is only achievable at certain times of the day?[7]

Broadband infrastructure: Where
is the UK starting from?

17. At first blush, statistics about international
broadband download speeds might suggest that the UK need look
no further than South Korea for lessons on how to build broadband
infrastructure. That is misleading for one simple reason, articulated
by Francesco Caio, author of the 2008 Department for Business,
Enterprise and Regulatory Reform report on broadband:

"There are other countries that have the benefit
of leapfrogging the development stage of the incumbent because
they are just late to the party and it is good for them, and clearly
Korea is one of them."[8]

By contrast, the UK does have an incumbent communications
infrastructure. Given limited resources, this somewhat removes
the reason for building a new onehowever technically brilliant
it could befrom scratch. When it comes to raising the standard
of broadband in the UK, it is vital to understand where we start
from and the way in which different communications technologies
carry data in different ways.

18. In the beginning there was copper, first
used for the 19th century telegraph. The physical medium over
which most people receive their internet connection in the UK
is a twisted pair of copper wires.[9]
Twisted pairs carry data through electromagnetic waves confined
within the metal. The copper telephone network was ideal for phone
calls which require only low frequency waves. The development
of digital subscriber line (DSL) technology in the 1990s used
higher-frequency waves to transfer data, initially at moderate
speeds. While technological improvements have increased DSL's
maximum download speed, higher speeds can only be carried over
ever shorter distances using copper wire, and the capacity of
all but the shortest copper telephone connections, it is safe
to say, is now being exceeded by demand for more data-intensive
applications.

Optical fibre

19. In addition to copper pairs, a range of other
broadband access technologies are available. Coaxial cables also
use copper to carry electromagnetic waves, but they can carry
higher frequenciesand so higher data ratesover longer
distances. Optical fibre networks, however, carry optical signals
along glass fibres thinner than a human hair. The cable network,
now mostly owned by Virgin Media, uses a mixture of optical fibre
and coaxial cables. The backbone network connecting our telephone
exchanges to each other, and to the global internet, is already
almost entirely optical fibre. Many argue that the future depends
on further deployment of optical fibre.

20. An optical fibre is a hair-thin rod made
of glass along which light of different wavelengths ('colours')
can travel. Investment in fibre is said to be future-proof in
the sense that fibre offers data rates far in excess of current
and predicted future demand, and in that there are no proposed
technologies that can offer comparable data rates over long distances.
To illustrate, the copper technology in use today is around 100,000
times as fast as Morse code, and is approaching its physical limits.
The bandwidth limits of fibre are around 100,000 times those of
copper. Fibre technology, it is therefore claimed, will accommodate
our bandwidth demands for decades to come.

The network architecture and the
options for fibre deployment

FIXED LINE

21. Much of the current debate about broadband
policy therefore revolves around questions to do with how deep
into the network fibre should be deployed; how close it should
be to the end user.[10]
In beginning to understand this issue, it is important to have
a grasp of the network architecture and, crucially, to note the
distinctions between:

· core communications networks, which carry
data around the UK and around the world;

· the middle mile networks (also referred
to as backhaul) which connect communities to the core network,
and;

· local access networks (also referred to
figuratively as the 'final mile'[11]),
which provide the final link (sometimes referred to as the final
drop) from a local telecoms exchange or cable television hub into
a premises.

It is generally acknowledged that the use of fibre
in the core and middle mile networks is needed to provide any
modern communications. An issue therefore arises of whether, and
to what extent, fibre, given its technological superiority, is
also used for the final link to a premises, instead of copper.

22. There are two major technological options
for fibre deployment in the access network, and these place different
constraints on the commercial organisation of infrastructure provision
and service delivery:[12]

(i) Fibre to the Premises (FTTP), also referred
to as Fibre to the Home (FTTH), where each customer has a fibre
link coming directly into the home or business, providing the
highest data rates and reliabilityreportedly the gold standardand;

(ii) Fibre to the Cabinet (FTTC), where fibre
runs from the exchange to street cabinets, but existing copper
is used for the final link into the home. Since the length of
copper wire used is shorter than if it were to run all the way
from the exchange, higher speeds can be achieved, but data rates
are still ultimately limited to a considerably lower rate than
is achievable with FTTH.

FIGURE 1

Network Architecture

23. FTTP can achieve data rates many orders of
magnitude greater than FTTC, but it is very expensive to install
new fibre links to existing premises. The Broadband Stakeholder
Group (the Government's advisory group on broadband) estimated
in September 2008 that national deployment of FTTC would cost
£5.1 billion, while taking fibre to every UK home could cost
as much as £28.8 billion, with the largest single cost component
being the civil infrastructure.[13]
New-build sites, however, can have FTTP installed at least as
cheaply as a copper cable. Critics of FTTC argue that while FTTC
is cheaper to install in the short term, it may prove more expensive
in the long run to upgrade FTTC to FTTP. If the deployment of
FTTP technology is chosen, there are still a number of options
available for how the network might be structured (detailed in
Chapter 4).

MOBILE, WIRELESS AND SATELLITE

24. There is also a role for wireless technologies
which can be used as an alternative to copper or fibre for the
final link to the premises. Wireless access networks, based on
radio waves travelling freely through the air, offer a solution
where installing fibre would be prohibitively expensive, for example
in sparsely populated rural areas. There is also increasing use
of broadband through the mobile network, where the link to the
fibre network occurs at the local cellular base station. In rural
areas, however, there is normally no nearby fibre network to link
up to; in densely-populated areas demand for mobile broadband
is already putting a strain on capacity, which is limited by the
amount of radio spectrum available. Developments in wireless technologies
such as 4G mobile broadband will allow wireless to achieve greater
data rates, but they will not achieve faster data rates than fibre
in the access network. Wireless technologies therefore seem to
us to have a complementary role, standing in for fibre where there
is none, and supplementing it where there is.

25. Satellite technology is also a technology
option, but it has high latency (it is a long way to space and
back). Furthermore, the total bandwidth available is spectrum-limited
just as for terrestrial wireless, so it is not possible to have
too many users in any one cell (the footprint on the ground of
a single satellite beam). Moreover, satellite typically has even
more stringent volume limits than mobile.

The Government's strategy

26. Against the background sketched above, in
December 2010 the Department for Culture, Media and Sport and
the Department for Business, Innovation and Skills published the
Government's broadband strategy, in which it set out a commitment
to deliver the best 'superfast' broadband network in Europe
by 2015. In order to judge what 'the best' means, the Government
adopted a scorecard which will take into account four key indicators:
take up and coverage, speed, price and choice. Ofcom expects to
publish the data for the 'best in Europe' scorecard this summer.

27. The Government's specific target is to provide superfast
broadband, defined as 24Mbps[14], to
at least 90 per cent of premises in the UK by 2015 and to provide
universal access to standard broadband with a speed of at least
2Mbps by 2015. It is not wholly clear from Britain's Superfast
Broadband Future why these speeds were chosen, but it is generally
understood that they were not entirely arbitrary. Steven Unger,
Chief Technology Officer, Ofcom, told us: "the rationale
for 2Mbps was that that was sufficient to support broadcast
quality video."[15]
In turn, the 24Mbps target seemed to relate to the highest headline
speed achievable over copper lines from the exchange. In addition
to the UK's targets, there is also a European dimension. The European
Commission has said that: "By 2020, all Europeans should
have access to internet of above 30 Mbps and 50% or more of European
households have subscriptions above 100Mbps."[16]
The Government have not put forward specific measures to reach
these European targets, which could be perceived as very ambitious.
Indeed, Ed Vaizey MP, Minister for Culture, Communications
and the Creative Industries, described them as "challenging".[17]

28. In terms of progress towards the UK Government's
targets, Ofcom figures report that the coverage of broadband at
2Mbps is 86% of existing connections.[18]
They also report that coverage of superfast broadband is around
60% of UK premises. There are striking regional variations: 94%
of premises in Northern Ireland have access to superfast broadband,
but for Wales and Scotland only 30 to 40% have access.[19]
While the Government's strategy is a UK wide strategy, the devolved
administrations in Wales, Scotland and Northern Ireland have all
identified broadband as a key policy area and have developed initiatives
for their own nations which complement policy at a UK level. This
report does not scrutinise in detail the strategies of the devolved
administrations nor the plans of individual local authorities
in England; it focuses on the overarching UK strategy and the
progress made in implementing it.

29. For the Government, the drivers for its broadband
strategy are economic growth and wider societal benefits. Unveiling
the strategy in 2010, the Secretary of State for the Olympics,
Culture, Media and Sport, Rt Hon Jeremy Hunt MP, stated boldly:

"A superfast network will be the foundation
for a new economic dynamism, creating hundreds of thousands of
jobs and adding billions to our GDP. But it is not just about
the economy, around the world there are countless examples of
superfast broadband helping to build a fairer and more prosperous
society, and to transform the relationship between Government
and citizens. And shifting Government services online will save
billions of pounds of taxpayers' money."[20]

30. Britain's Superfast Broadband Future
stated that while the UK was in a sound position, with a competitive
market and 71% of UK households having broadband access, it was
clear that the UK's use of the internet was going to require improvements
to the network. The Government maintained that while its strategy
was technology neutral, the deployment of fibre deeper into the
network seemed inevitable.[21]
The Government also acknowledged that the business case for rolling
out broadband in less densely populated areas was challenging.[22]

31. The Government's strategy and targets are
therefore predicated on the basis that the market will deliver
some, but not all of the investment required. The critical difference
between deployment of 1st generation broadband and
the current superfast deployment was the existence of BT's copper
network which has been used to deliver several generations of
broadband technology by simply upgrading the active equipment
in homes and exchanges. Progress towards superfast provision now
requires new fibre in the local access network and the middle
mile because copper can only carry superfast speeds over a short
distancea kilometre or less.

32. There is a clear social cost of weak broadband
performance in pockets of the UK. It is widely accepted that the
market will deliver improvements to at least two thirds of households
(58% of premises already have superfast coverage). Reaching the
remainder, however, as the 'final third' of the population, requires
Government support or a socially corrosive digital divide will
follow. As with much of the nomenclature in the field of broadband
infrastructure, the 'final third' can be misleading. It refers
to the third of the population to whom infrastructure providers
are less commercially motivated to build new network connections
due to the weakness of the case for investment. For purposes of
illustration, it would be helpful to show just where these individuals
are located in the country. However, it is difficult to identify
them on a map for a simple reason: when we have tried to do so,
we have found that they are located almost everywhere.[23]
This is because people without adequate broadband infrastructure
are often surrounded by it. The final third must not be understood,
therefore, as a geographical area. Nonetheless, it must be said
that the geography of rural areas does make them the hardest to
reach.[24] Broadband
performance is already lower in areas of low population density
across the UK because the copper lines are longer. Furthermore,
there is a weaker commercial case for private investment in rural
areas due to the high cost of building new networks where there
is a large distance between premises.

33. To this end, the Government have allocated
£530m within the lifetime of the current Parliament to stimulate
commercial investment in rolling out superfast broadband in areas
where the case for commercial investment is weak or non-existent.
It has also indicated that a further £300 million may be
available for investment in broadband up to 2017.[25]
The Government see the lack of any commercial interest in deploying
superfast broadband in the final third as a market failure that
warrants state intervention. The important point to note about
the Government's strategy is that they are focusing resources
on the local access network, as this is the most challenging investment
case for the market.

34. Britain's Superfast Broadband Future
was clear that the Government's strategy would draw on the ethos
of the 'Big Society.' Communities would be enabled to influence
or take part in extending access networks; community need and
aspiration should drive forward the process, not decisions made
in Whitehall.[26]

35. Broadband Delivery UK (BDUK), a unit within
the Department for Culture, Media and Sport (DCMS), is responsible
for managing the Government's broadband funding. Britain's
Superfast Broadband Future envisaged that the £530 million
of funding would be released by BDUK in waves, beginning with
four pilot areas (Cumbria, the Highlands and the Islands, Herefordshire
and North Yorkshire), to local authorities and the devolved administrations.
To access funding for roll-out, local authorities in England were
asked by the Government to prepare local broadband plans for approval.
Moreover, local authorities in England and the devolved administrations
have to put in place matching funding from their own resources,
and possibly try to access EU funds (the Government have suggested
that the European Regional Development Fund could provide up to
£100 million[27]).
These various sources of public funding combine to fill the gap
between the proposed private investment and the total required.
In addition, the Department for the Environment, Food and Rural
Affairs (Defra) have a further discrete broadband fund of £20
million specifically for rural areas, called the Rural Community
Broadband Fund. It aims to enable communities outside the 90%
coverage areas to have superfast broadband services if they can
demonstrate local need or demand, feasibility and cost-effectiveness.

36. The issue of state aid has become a pivotal
factor in the implementation of the Government's strategy. The
European Union recognises that state aid may be needed to deliver
a broadband infrastructure that will maximise societal benefits.
In essence, a 'market failure' exists if markets, without intervention,
fail to deliver an outcome that would yield the highest possible
welfare benefits for society. This may arise for instance in terms
of socially profitable investments not being undertaken. In such
cases, the granting of state aid may produce positive effects
and overall efficiency can be improved by adjusting incentives
for firms.[28] Such public
financing must respect EU competition and state aid rules. These
are complex. However, the underlying principle is simple. It is
to ensure that no aid granted by a Member State or through state
resources in any form whatsoever may distort or threaten to distort
competition by favouring certain undertakings or the production
of certain goods.[29]
This end is typically achieved by the imposition of various 'remedies';
for example, by imposing conditions to ensure that competitors
have 'open access' to infrastructure created with state aid. BDUK
have decided, with encouragement from the European Commission,
to put in place a single umbrella scheme for the benefit of all
local broadband projects. The details of this scheme are currently
the subject of negotiations between the UK Government and the
EU Commission.

37. As of 10 July 2012, a total of 44 out of
45 local broadband plans, detailing exactly how local authorities
in England will roll-out superfast broadband in their areas, have
been approved by the Secretary of State. However, action is stalled
pending resolution of the state aid impasse.

38. The Government have also established a separate
fund to create 'Super-Connected Cities'many of which have
pockets of low internet connectivity adjacent to areas of strong
provisionwith access to speeds of at least 80-100 Mbps
across a wide area of the cities. In the Budget earlier this year,
the Chancellor of the Exchequer revealed that the UK's first Super-Connected
CitiesBirmingham, Bristol, Leeds & Bradford, Newcastle
and Manchester along with the four UK capital citieshad
all successfully bid to become Super-Connected Cities with so-called
'ultrafast' fixed broadband access, and large areas of public
wireless connectivity.[30]
Ultrafast broadband is defined as having a minimum download speed
of at least 80Mbps.[31]
The cities will share £100 million (this is a separate pot
of money from the £530 million for the 'final third') to
help deliver plans to use super-connected status to boost growth,
attract new businesses and enhance the way services are provided
and accessed. In addition, the Chancellor has announced that a
new £50 million fund would be created to bring ultrafast
broadband to further UK cities.[32]
Together, the Government claim, the proposals involve providing
ultrafast broadband access to around 1.7 million premises and
200,000 businesses by 2015 while almost 3 million residents would
have access to a municipal wireless network.[33]

39. In a further strand of digital policy, the
Government's £150m investment in the Mobile Infrastructure
Project (MIP) is intended to extend and improve mobile coveragethat
is to say, extend the mobile network to so-called 'not-spots'
by subsidising the construction of mobile masts and other infrastructure
in remote locations. Some areas of the UK are not provided with
any mobile coverage by mobile network operators and other areas
receive low quality coverage which results in a poor level of
service. In certain areas of the UKparticularly rural areasthere
is a limited commercial case for market-driven private investment
to improve coverage and quality of service.

Industry approach

40. There are two major local access networks
(the final mile) for broadband in the UK: BT's copper telephone
network and Virgin Media's cable television network which almost
entirely runs in parallel with BT's network.[34]
BT is, however, undertaking a very significant upgrade of its
network and has already committed £2.5 billion to roll out
fibre which will deliver speeds of up to 80 Mbps to two-thirds
of UK premises by the end of 2014. BT is bidding for public funds
(from the £530 million pot) and working with local authorities
to extend roll-out into areas where the commercial case for investment
is more difficult (the final third). If successful in most of
these bids, BT claims that it can deliver superfast broadband
to more than 90% of UK premises. BT states that its commercial
roll-out of fibre is progressing rapidly, with more than 10 million
of the UK's 28 million premises now passed by a BT fibre optic
connection. BT's fibre deployment is primarily by means of FTTC
with its copper network being used for the final link from the
local cabinet to the home. It is Openreach, the subsidiary of
BT Group, which owns and manages the access network infrastructure.[35]
Notably, BT has stressed that investing in fibre access networks
is a high risk investment:

"Our fibre business case has a pay-back period
of about 12 years. That is to say we do not get our money back
for 12 years, and that is on the assumption that we achieve the
volumes of customers we hope to achieve in our business case.
That is a long-term investment that most commercial organisations
would not tolerate."

Significantly, BT has indicated that in order to
support the Government's policy objectives they are "willing
to spend a further £1 billion or so of BT's capital to match
Government funding to do that, to roll it out into the final third,
and to get as far as we possibly can into the final third..."[36]
While BT's fibre deployment is primarily by means of FTTC, it
has recently launched a FTTP range of products and has announced
plans to make a form of FTTP available 'on demand' in areas covered
by its FTTC network.[37]

41. Virgin Media's cable network covers around
50% of the UK population. Over the last 20 years, Virgin states
that the cable industry has invested over £13.5 billion in
a fibre-rich network that has the capacity to deliver superfast
broadband to around 13 million homes across the UK.[38]
Virgin Media is currently offering speeds to consumers of up to
100 Mbps, which it refers to as 'ultrafast'. Virgin has no current
plans to expand its infrastructure footprint substantially.

42. Fujitsu has also been engaged in the Government's
plans and the BDUK procurement process. In April 2011, it announced
plans, in collaboration with Virgin Media, TalkTalk and Cisco,
to deliver next generation internet services to 5 million homes
in rural Britain, describing the collaboration and build of a
new superfast, fibre optic broadband network as "a ground
breaking and innovative alternative to BT Openreach."[39]
In the majority of areas, Fujitsu said that it would provide fibre
directly to the home, rather than to the local street cabinet.
Recent reports, however, suggest that Fujitsu has withdrawn from
the BDUK procurement for the time being, albeit that it is committed
to bidding in the future, causing concerns about the competitiveness
of the tendering process and leaving BT as the only provider that
has so far secured public funds.[40]

43. Companies in this sector have clearly been
reluctant to participate in the Government's procurement programme
and bid for funding. Prior to Fujitsu's recent decision to withdraw
for the time being, seven of the original nine contenders had
already withdrawn from BDUK's framework procurement process. Geo,
for example, cited a number of concerns, including the accusation
that the gap funding model (see Box 4 in Chapter 4) adopted by
BDUK and local authorities favours the incumbent.[41]

44. The regulatory framework for the industry
designed and enforced by Ofcom is based on a number of European
Union (EU) directives which have been implemented into UK law
by the Communications Act 2003.The framework is based on competition
law principles, meaning that market interventions are only permissible
if a market assessment concludes that one or more companies hold
a position of significant market power (SMP) in the market. The
obligations set by Ofcom are currently targeted at addressing
identified market power in specific, narrowly-defined markets.
An impact/cost-benefit assessment must demonstrate that any intervention
is proportionate and reasonable. The regulatory framework has
a specific and defined purpose and its implementation is subject
to legal challenge.

The regulatory framework will be elaborated on
in detail in later chapters. In particular, the final paragraphs
of Chapter 4 consider the implications of the fact that since
May 2011, Ofcom has had the power, by virtue of Article 12 of
the Revised EU Framework Directive, to impose regulatory obligations
with regard to infrastructure sharing in the broadband market
without reference to significant market power. This seemingly
small change may have a significant impact on policy (see paragraphs
221 to 236).